10 Money FAQs You Should Be Able To Answer

April 30, 2018

April is Financial Literacy Month, which means 30 days dedicated to financial literacy — more than most of us ever got growing up.

Only 17 states require that students take a personal finance course to graduate from high school, a number that’s barely budged in years. If you didn’t happen to grow up in Missouri, Virginia, Utah or the other 14 states that offer formal required courses, there’s a good chance you were never taught all the basics of money management. (Which helps explain why an estimated two-thirds of Americans can’t pass a basic financial literacy test.)

But it’s not too late to catch up. Being able to answer these 10 key money questions is a good place to start.

One guideline you can use is the 50-20-30 budget: half your income goes to essentials, 20 percent is saved and invested and 30 percent is leftover for wants.

2. How much should I save for emergencies?

Financial advisors generally agree that three to six months’ worth of living expenses is a good target. If that’s an intimidating sum, shoot for $1,000 to start. That’s generally enough to cover most unexpected expenses, like a car repair or medical bill. From there, keep saving little by little until you’ve got enough cushion to cover your basic bills long enough to find another job in case you’re laid off.

3. What’s a good credit score, and why should I care?

On a scale of 300 to 850, a FICO score of 700 to 749 qualifies as “good.” Anything higher is deemed “excellent.”

Scoring well can equal significant savings. Your credit score quickly tells potential lenders whether they can trust you to pay them back on time and in full. A high score indicates you’ll be a responsible borrower, so you should get the best interest rates on a loan or card.

4. How can I improve my credit score?

Generally, the best ways are to pay your bills on time every month and have low (or no) debt. That said, asking for an increase in your credit limit can give you a quick boost, as long as you don’t use it — and you pay any balance off each month.

You should regularly review your credit report to see what’s affecting your score. That also allows you to be sure there are no costly errors bringing you down. Get a free copy of your report at AnnualCreditReport.comonce every 12 months from each major credit bureau: Equifax, Experian, and TransUnion.

5. What is compounding?

When you save and invest your money, it earns interest and grows — and then that growth earns interest, too. For example, if you invest $100 and get a 10 percent annual return, you’ll have $110 in one year, but $121 the next (since your $10 earned 10 percent, too), and so on. It seems like magic, but it’s actually just math. That’s why it pays to start investing early, even if you only have a little to spare. The more time you give your money to grow, the bigger your potential gains.

6. What’s diversification?

It’s when you mix and match investments — like stocks and bonds, real estate and cash — to create one portfolio. Having a well-diversified portfolio means that even when some of your investments are down, others should hold up and stabilize your wealth.

ETFs — or exchange-traded funds — are traded on an exchange, so, like stocks, you can buy and sell shares at various prices throughout the trading day. Mutual funds, on the other hand, are bought and sold once the market closes each day. ETFs tend to be cheaper, with “expense ratios” as low as .03 percent — mainly because they’re often designed to simply track an index rather than be actively managed.

8. What’s an expense ratio?

It’s how much you pay to invest in a fund, and it’s expressed as a percentage of your assets. For example, if the expense ratio is 1 percent and you invest $1,000, your fee is $10.

It’s generally taken out of the fund’s returns, so you may not even realize you paid a fee. But it can add up. After all, you’re not just giving up the money today — you’re missing the compound growth that money could generate. Look for expense ratios under 1 percent for actively managed mutual funds and 0.5 percent for ETFs.

9. What’s the difference between stocks and bonds?

When you buy a stock, you become a part owner of the company. When you buy a company’s bond, you become a lender. (You can also own government-issued bonds.) In both cases, you’re rooting for the company to do well, but with the former, the firm’s success could translate to a bigger payday for you. Its failure is your loss, too, though. Bonds are generally considered less risky investments since you get paid back with interest either way — unless the company goes under. So look at a bond’s rating before buying to see how risky it is. On Standard & Poor’s scale, “AAA” and “AA” indicate high-quality investment grade.

10. How much should I invest?

Everyone has different financial goals, so how much you need to achieve them depends on your unique situation. Still, rules of thumb can be handy, and one is that you should aim to save or invest 20 percent of your annual income. Regardless of how much you can put away today, the most important thing is to just start. For one, you’ll get in the habit, which makes it easier to invest more as your paycheck increases. And you’ll give your money time to grow.